Alpine Income Property Trust: Externally Managed REIT; Take A Pass

Over the last couple of months, I have been looking for new ideas in several sectors, including energy and real estate. Some of my best ideas currently are stocks that I already own, but one of the new REITs I have started to look at recently is Alpine Income Property Trust (NYSE:PINE). I love owning dividend stocks and REITs, but when it comes to REITs, I strongly prefer internally managed ones. The externally managed REITs typically underperform internally managed ones, and I have found that the cheap REITs typically stay cheap for a reason.

Investment Thesis

Some investors like Alpine for its cheap valuation and the 5.5% dividend. They have had significant portfolio growth since their IPO in 2019 along with impressive dividend growth. However, I think the external management structure is enough reason to look elsewhere in the REIT sector. The external management will be in place at least until the second half of 2024, and I think it will probably be cost-prohibitive to internalize management, at least with current contract terms. In my opinion, most of the returns for Alpine investors will come from the dividend, and I find other net lease REITs to be better options for long-term investors.

External Management Spells Trouble

I took a look at the 10-K which came out recently, and there are a couple of things worth pointing out. The company owns a portfolio of net lease tenants that has grown significantly since the IPO, but I don’t find the tenant list all that attractive. While I’m indifferent on Alpine’s real estate portfolio, one of the biggest red flags for me is Alpine’s external management. They are externally managed by CTO Realty Growth (CTO), the REIT that spun them off near the end of 2019.

The external management is the biggest reason to stay away from Alpine in my opinion. They pay 1.5% per year plus a potential incentive fee. Like any external management structure, the management fees are going to eat away at the potential returns for investors. CTO’s management is somewhat aligned with shareholders with their 14% stake, so I think the dividend hikes will likely continue, but I don’t see a reason to own Alpine with the current management structure.

The management contract will last at least until the end of 2024 and has one-year extension options. To terminate the contract and switch to internal management, Alpine will have to cough up a large sum, which is a one-time payment of three times the average management fee for the preceding two years, plus the average incentive fee from the two-year period I had to read the 10-K section a couple of times to understand it, but here is how I understood it:

Take the average annual fee from the two years leading up to internalisation, add the average annual incentives from the two-year period, then multiply that by three to get the one-time payment. Basically, they will have to pay a lump sum equal to three years’ worth of management fees all at once to internalize management. This makes me question if management will be internalized any time soon, even with the end of the five-year term coming at the end of 2024. Some investors are bullish on Alpine due to its cheap valuation, but I think the REIT is cheap for a reason.

Valuation

Shares have had a nice run since October of about 30%. Shares still look cheap on paper at a price/FFO of 12x, but I wouldn’t count on any long-term multiple expansion from here. Personally, I would rather pay a higher multiple for an internally managed REIT in the same sector. The recent run in shares puts them right around fair value in my opinion.

Yes, the REIT has grown significantly in the last couple of years, but future estimates aren’t expecting much FFO/share growth. My guess is that most of the returns for investors will be driven by the dividend payout, without much share price appreciation. One area that Alpine has excelled in since 2019 is their dividend growth. I’m curious to see if it continues, but my guess is that Alpine’s best dividend growth is in the past.

The Dividend

Since 2019, the dividend has grown significantly, going from a quarterly payout of $0.20 to $0.275. The yield currently sits at 5.5%, a number that probably draws most investors into considering Alpine. My base case is that the dividend growth will slow in future years, but I will keep an eye on the REIT to see if that is how things play out. Unless FFO/share growth is much better than estimates, I doubt the dividend will continue to grow at a similar rate to the last couple of years.

Conclusion

Alpine has provided solid returns for investors, especially those bought after the selloff in 2020. The company has a real estate portfolio that has grown significantly since the IPO, but the external management is likely going to spell problems for long-term investors. There is potential that Alpine will internalize management, but the cost might be prohibitive, and it will certainly be a hit for the value of the REIT. Shares look cheap on paper at a price/FFO of 12x, but they are cheap for a reason.

I think most of the returns for investors will likely come from the 5.5% yield, but I think the dividend growth will probably slow in the next couple of years. If you are looking for net lease REITs, I would strongly recommend sticking with internally managed REITs like Realty Income (O) or Agree Realty (ADC). The dividend yield might not be as high, but I am betting that they will outperform externally managed REITs like Alpine Income Property Trust over the next couple of years.